[ A L G O R I T H M I C
T R A D I N G
production are likely.
Simple and fast still matters
Respondents’ reasons for using algos,
presented in Figure 2 as a percentage
of responses, differ between 2020 and
2019. Overall, increases are seen in six
areas of algo trading this year versus
last: ease of use, increased trader pro-
ductivity, greater anonymity, smart
order routing, routing logic, and pre-
trade estimates. Meanwhile, decreases
are observed in seven categories
over the same period: consistency of
execution performance, the reduction
of market impact, algo monitoring,
lower commission rates, better prices,
higher speed, and customisation.
Thus, net/net, there is a greater focus
on working orders quickly, easily,
and in a sophisticated manner that
protects information leakage. There
is less emphasis being placed on
(implicitly/explicitly) cheaper algos,
those that are faster than others, or
those that can be highly customised
to provide a consistent and superior
outcome.
"One and done" may be a relic
of the past
Across the board, it is evident that
long-only funds of varying assets un-
der management (AUM) are mostly
looking to at least two algo providers
(Figure 3). From a diversification
and business-continuity perspective,
managers are likely unwilling to place
all of their eggs in one basket and risk
a provider outage. The smallest firms,
including those managing up to US$1
billion, appear to be comfortable
with using roughly two providers.
Larger firms, such as those with an
AUM range of US$1 billion to US$10
billion, likely rely on three. The largest
firms with AUM over US$10 billion
work with about four algo providers.
Digging into the details a bit,
long-only managers with US$0.25
billion to US$0.5 billion in AUM
show a year-over-year decrease in the
78 // TheTRADE // Spring 2020
S U R V E Y ]
Figure 2: Reasons for using algos (% of respondents)
Feature
2020
Ease-of-use
2019
11.08
2018
10.98 14.57
Consistency of execution performance 10.51 11.25 13.69
Increase trader productivity 10.45 10.05 11.29
Reduce market impact 10.29 10.98 11.93
Greater anonymity 9.93 7.64 9.18
Flexibility and sophistication of smart order routing 8.02 7.59 n/a
Algo monitoring capabilities 7.20 7.64 n/a
Lower commission rates 6.83 8.28 7.98
Better prices (price improvement) 6.65 7.13 7.78
Higher speed lower latency 6.56 6.81 7.90
Customisation capabilities 5.74 6.39 7.74
Data on venue/order routing logic or analysis 5.07 4.14 n/a
Results match pre-trade estimates 1.67 1.12 3.27
number of algo providers, falling to
1.83 in 2020 from 2.20 in 2019, on av-
erage. No doubt, cost pressures have
kept them from opening up the purse
strings to engage with additional
providers. Likewise, larger managers
with over US$50 billion in AUM have
also scaled back and consolidated
their relationships to an average of
4.02 providers this year from 4.45 in
2019. While having four providers
still appears to be a well-diversified
strategy, adding more (e.g., equity
algo providers) may have diminishing
returns in light of limited commission
budgets to pay for research and other
services.
Larger managers are generally more
likely to be motivated to use several
algo providers, given the resourc-
es they are able to put to work as
well as the requirements necessary
for managing a multi-asset class
portfolio. Looking beyond equity
algorithms, the rise of algo use in the
foreign exchange (FX) asset class has
grown over the years for spot trading
and, recently, has begun to extend
to FX derivatives such as non-deliv-
erable forwards. New regulations,
such as the uncleared margin rules,
are driving FX derivatives into the
Figure 3: Average number of providers used by AUM (USD billions)
Feature
Not answered
2020
2019
3.42
2018
2.33 2.87
Up to 0.25 2.14 2.13 2.50
0.25-0.5 1.83 2.20 2.17
0.5-1 2.00 1.43 2.50
1 to 10 3.33 2.90 3.64
10 to 50 4.25 3.73 4.26
More than 50 4.02 4.45 4.41